Why U.S. Lost its Triple A Credit Rating

U.S. credit rating downgraded by Standard & Poor’s

Credit rating agency Standard & Poor’s has downgraded the U.S. debt rating for the first time since the country won the top ranking in 1917. The rating was dropped from AAA to AA+ because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country’s debt situation and S&P’s was “pessimistic about the capacity of Congress and the administration to leverage their agreement this week into a broader [deficit cutting] plan that stabilizes the government’s debt dynamics any time soon.” S&P also issued a negative outlook, meaning that there was a chance it will lower the rating further within the next two years, and warned that a downgrade to AA would occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period. Words: 733

So says Konrad Yakabuski (www.theglobeandmail.com) in paraphrased excerpts from the original article* which Lorimer Wilson, editor of www.munKNEE.com(It’s all about Money!), has further edited below for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Yakabuski goes on to say:

The credit rating agency was scathing in its rebuke of the U.S. political class after Sunday’s $2.4-trillion (U.S.) deficit reduction deal. It stated that that the “brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective and less predictable.”

The humbling downgrade – 16 countries now have a higher credit rating than the United States – capped a tumultuous week on global stock markets. The dive reflected a loss of investor faith in the ability of politicians and central banks in the developed countries to fix the underlying structural problems in their economies. (The two other leading credit rating agencies, Moody’s Investor Services and Fitch Ratings, have already confirmed they intend to, for now, maintain the U.S. top-tier rating.)

It is unclear what impact S&P’s move will have on U.S. interest rates which are currently at rock bottom levels. A lower credit rating typically requires borrowers to pay a higher rate but yields on U.S. Treasury bonds are at historic lows. Even without its triple-A rating, however, U.S. debt is seen as one of the safest investments in the world and investors clearly weren’t being scared away this week. While stocks were plunging, investors were buying treasury bonds.

S&P’s report underscores the fact that the U.S. President is hobbled by a political system that saps what little power he and Congress have to restore economic confidence. European leaders are similarly hamstrung by dysfunctional political systems. Their attempts to contain the euro-zone debt crisis have repeatedly come up short because the measures needed to comfort financial markets exceed the tolerance of voters.

On both sides of the Atlantic, explained Sebastian Mallaby, a Washington-based senior fellow at the Council on Foreign Relations “you’re caught between the politicians feeling as if they are making a heroic effort, pushing the boundaries of what they regard as politically possible, and [the fact] that it doesn’t come near to what is economically necessary.”

Global stock markets have cratered because, after weeks of debating, dissecting and diagnosing what ails their respective economies, U.S. and European policy makers have not been able to bring themselves to administer the bitter medicine they have all acknowledged is needed to cure their metastasizing disease of excessive debt.

The resolution of the U.S. debt-ceiling stand-off has not provided any comfort to investors, either. Their brief relief at seeing the stand-off end was soon displaced by their realization that the deal’s $2.4-trillion in cuts – all subject to repeal by a future Congress – came up short. Financial markets had been conditioned by Mr. Obama’s own advisers to look for a debt-ceiling deal that would slash the U.S. by deficit by $4-trillion over 10 years.

S&P’s verdict was swift and brutal but it will not make tackling the problem any easier. In short, the credit rating agencies have an easier job than the politicians.

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
– Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above

One comment

Any real world ideas on what might happen with the stock market as well as gold/silver prices as a result of this downgrade? Ive pretty much covered all of my bases and feel secure everywhere except one point… my mortgage. Its set to adjust next month and its connected with the LIBOR index. So initially my first adjustment looks good… from 5% to 3% now for the next 6 months at which point it will adjust again to the LIBOR. Im trying to take care of this, but in the mean time what do you foresee with interest rates and the LIBOR index? Thanks! Love your site!

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